The Supreme Court and “Pay for Delay:” The Potential Impact on Pharma
In early December of last year, the U.S. Supreme Court agreed to hear a case to decide whether agreements between brand-name pharmaceutical companies and generic makers to delay the entry of generic drugs to the market—so called “pay for delay” deals—violate antitrust laws. “In a typical case, a generic rival challenges the patent of a brand-name competitor, which then pays the rival a sum of money to drop its challenge,” reported Reuters.
Patents on drugs can last as long as 20 years and drug companies can sometimes extend the protection for their products by obtaining separate patents for a coating or a slightly different product that includes inactive ingredients.
In 1984, Congress passed the Hatch-Waxman Act to help speed the introduction of low-cost generic drugs to market.” The legislation encouraged generic makers to contest the extended patents for costly drugs because typically, “when a generic firm puts a copycat version on the market, the price for the drug immediately drops about 30%. When more than one generic maker is competing for sales, the price of the original brand-name drug can fall as much as 90%.” As a result, the maker of a brand-name drug has a huge incentive to try to preserve its monopoly as long as possible.
Under the Act, the first company to win UFDA approval to sell a generic drug before the underlying patent expires has a 180-day exclusive right to market that product. This incentive, however, has created “lengthy legal battles over the validity of a drug’s patents.” Accordingly, lawyers for the brand-name makers got clever and “decided that it often made sense to settle the litigation by paying the generic firm not to enter the market for several months or years.”
As the Los Angeles Times noted, several federal courts in the last decade “have upheld such agreements on the grounds that they are settlements of disputes over patents.” The FTC case will be decided by an eight-member court. Justice Samuel Alito recused himself, without giving a reason. Oral arguments will be in the spring, with a decision expected by the end of June.
The Federal Trade Commission (FTC), however, has been challenging these agreements as illegally stifling competition and preserving monopolies. Last year, FTC said that 28 such deals were made, and between 127 of such arrangements were struck between 2005 and 2011, at an annual cost to consumers of $3.5 billion in artificially higher prices. “When drug companies agree not to compete, consumers lose,” FTC Chairman Jon Leibowitz said. FTC added that generic-drug makers in the 1990s and early 2000s won about 75 percent of the patent suits that have been litigated to final judgment.
FTC and several other agencies have called on Congress to pass legislation that would prohibit or severely restrict such deals. For example, in November 2011, the nonpartisan Congressional Budget Office (CBO) said a U.S. Senate bill to ban reverse payments would save the government $4.79 billion and lower U.S. spending on prescription drugs by $11 billion over a decade. The bill – S.27: Preserve Access to Affordable Generics Act – would modify how FTC conducts enforcement proceedings against parties to an agreement to settle a claim of patent infringement in specific cases. Under the bill, certain settlement agreements between drug companies would be presumed anti-competitive and unlawful; they would only be allowed if the parties can demonstrate by clear and convincing evidence that the pro-competitive benefits of the agreement outweigh the anti-competitive effects of the agreement.
The agreements affected by the bill are ones in which the manufacturer of the generic version of the drug receives anything of value from the manufacturer of the brand-name drug and the generic drug manufacturer agrees to limit or forgo research, development, manufacturing, marketing, or sale of the generic drug for any period of time. The bill, however, would permit a brand manufacturer to grant certain types of consideration to the manufacturer of the generic version of the drug under settlement agreements. Such exemptions include the right to market the generic drug before the expiration of patents or other statutory restrictions that aim to prevent such marketing. The legislation also would allow FTC to establish additional exemptions through rulemaking procedures.
In addition, Attorneys general from 31 states have joined the FTC in urging the Supreme Court to review the legality of — and halt — generic and brand-drug makers’ pay-for-delay agreements by overturning an 11th Circuit Court’s decision that upheld the legality of reverse patent settlements. The states said the court should take up the issue to resolve a lower-court split that has spurred industry uncertainty. In addition, the American Medical Association took a different stance recently, voting at its semiannual policy-making meeting to back ending the practice of pay-for-delay settlements.
“The federal antitrust laws flatly prohibit potential competitors from forming naked agreements not to compete,” the FTC said in a petition it filed with the Supreme Court. The pharmaceutical industry has argued that “the patent settlements are good for competition because they allow generic drugs on the market before the patent expires on a branded drug, while removing the uncertainty of litigation for both sides,” the Wall Street Journal reported.
“At the most fundamental level, a patent owner has the right to defend a valid patent, and settlements are a tool that can allow this to happen without the burden of engaging in a costly, extensive legal battle,” said Matthew Bennett, vice president of the Pharmaceutical Research and Manufacturers of America (PhRMA).
“The deals also are referred to as reverse-payment agreements because the patent holder pays the generic firm not to sell the generic version for a set period of time. That’s the reverse of the typical situation in which a patent holder wins damages from the violator, either in court or in a settlement,” the LA Times noted.
Politico reported that “Both the generic and name-brand pharmaceutical industries defend the settlements … [because] the deals are an efficient and, from a business perspective, predictable alternative to the uncertainty about expensive patent lawsuits fought to the bitter end.” The drug industry argues that in all cases, “generics come on the market before the original patents expire and sometimes sooner than they would have even in the case of a successful patent challenge.”
Generic drug makers say that the payments preserve a system that has saved American consumers hundreds of billions of dollars. “This case could determine how an entire industry does business because it would dramatically affect the economics of each decision to introduce a new generic drug,” Ralph G. Neas, president of the Generic Pharmaceutical Association, said in a statement to the New York Times. “The current industry paradigm of challenging patents on branded drugs in order to bring new generics to market as soon as possible has produced $1.06 trillion in savings over the past 10 years.” “The facts are clear. Patent settlements save. They are pro competition, pro-consumer and have saved consumers and taxpayers billions of dollars.”
FTC v. Watson
The Supreme Court said that it would rule early next year on whether a deal between the Abbott Laboratories unit Solvay Pharmaceuticals Inc. and Watson Pharmaceuticals Inc. could be challenged under federal antitrust laws. FTC alleges that Solvay entered into anticompetitive patent settlements with Watson and generic-drug makers Par Pharmaceutical Cos. and Paddock Holdings Inc. to delay the introduction of a generic competitor to the testosterone-replacement drug AndroGel. The court will also hear two similar cases.
The drug generated nearly $875 million in sales last year. Solvay agreed to pay more than $19 million a year to Watson to help market the drug in return for Watson’s promise not to introduce a competitive pill until 2015. Solvay’s patent had expired. Reuters reported that annual payments from Solvay ranged from $31 million to $42 million, and were intended to help Solvay preserve annual profits estimated at $125 million.
The U.S. 11th Circuit Court of Appeals in Atlanta decided that the pay-for-delay agreement over AndroGel did not constitute an illegal restraint of trade. The court ruled for the brand-name “drug makers, saying a patent is a government-granted monopoly that allows a drug company to exclude competitors from using the patented invention.” This was the third time since 2003 a federal court has upheld such agreements—doing so “as long as the allegedly anticompetitive behavior that results — in this case, keeping the generic drug off the market — is the same thing that would take place if the brand-name company’s patent were upheld.” The other cases were in the Federal Circuit and the Second Circuit.
The generic-drug companies in 2003 asserted in filings with the Food and Drug Administration (FDA) that their proposed generic versions “wouldn’t infringe Solvay’s AndroGel patent and argued that the patent was invalid. Patent-infringement litigation between the companies was pending in federal court when the sides agreed to the settlements in 2006,” WSJ reported.
“The FTC said Solvay bought itself years of drug exclusivity by paying the generic-drug makers tens of millions of dollars annually to stay out of the market until 2015, by which time Solvay planned to shift patients to a new drug with no generic equivalent.” The agency said that if the patent litigation hadn’t been settled, Solvay likely would have lost in court, which would have cleared the way for the generic-drug makers to move forward with less-expensive AndroGel copycats.
“Solvay and the generic-drug makers said the 2015 market-entry date provided by the settlements was five years earlier than when the Solvay patent expired. The generic-drug companies said there was no guarantee that they would have won a court fight. Solvay said the money it agreed to pay in the settlement was for marketing and manufacturing services provide by the generic-drug companies.”
The FTC’s position “would have a tremendously detrimental impact on the availability of generic alternatives in the marketplace,” generic-drug maker Watson Pharmaceuticals Inc. said in a brief it filed with the court. “Solvay agreed to less exclusion than it lawfully and realistically might have obtained in the exercise of its constitutionally protected right to assert its patent reasonably,” the Abbott unit argued in court papers reported by Bloomberg News. The companies say the payments were compensation for services to be provided by the generic-drug makers, including Watson’s marketing of Androgel to urologists.
The FTC says it has less concern about settlements that set a date for generic entry without involving a payment, accords the agency says may simply reflect the prospects of success in the infringement case. A reverse payment, by contrast, “is most naturally understood as consideration for the generic manufacturer’s agreement to delay market entry,” the FTC said.
Other “Pay for Delay” Cases
Although the 11th Circuit upheld the reverse payment agreement, the U.S. 3rd Circuit Court of Appeals in Philadelphia took the opposite view in a case involving K-Dur, a drug used to treat a potassium deficiency. The court ruled in July 2012 that “drug-patent settlements are legally suspect unless the drug makers involved can show that such agreements are good for competition. The decision revived a class-action antitrust lawsuit challenging an agreement between a Merck & Co. unit and a generic-drug maker that delayed a competing generic version. Upsher-Smith Laboratories Inc was paid more than $60 million, court records show.
A client alert from Arnold & Porter LLP gives an in-depth summary and analysis of the case. According to the alert, the court held that “although such settlements are not illegal per se, they are presumptively unlawful under the rule of reason. In so doing it rejected the approach adopted by the Second, Eleventh, and Federal Circuits, all of which have held that a settlement that does not restrain trade beyond what would result if the patent holder won the litigation is not unlawful, regardless of the existence of a reverse payment.
The Third Circuit rejected the drugmakers’ “scope of the patent test” argument in the case and said that any form of payment flowing from the patent holder to the challenger who agrees to delay market entry was an “unreasonable restraint of trade.” Senator Charles E. Grassley, an Iowa Republican who co-sponsored the Senate bill noted above, which never came to the floor for a vote, praised the decision. “The split between the circuits set the stage for the high court to intervene (FTC vs. Watson Pharmaceuticals),” the LA Times noted. In August, Merck & Co. asked the Supreme Court to review that case.
“This case presents one of the most significant unresolved legal questions currently affecting the pharmaceutical industry: what is the appropriate antitrust standard for evaluating settlements of patent litigation between brand manufacturers and generic manufacturers, where the settlement includes a payment from the brand manufacturer to the generic manufacturer?” Merck lawyers wrote at the time.
“That question has been percolating in the lower courts for more than a decade. Until the decision in this case, the courts of appeals had consistently held that the federal antitrust laws generally permit a settlement that includes a payment from the brand manufacturer to the generic manufacturer, as long as the settlement does not exclude competition beyond the scope of the patent. The Third Circuit’s decision in this case dramatically departs from the prevailing view,” Merck lawyers wrote in their brief.
In an amicus brief written by PhRMA, the trade group asserted that “By restricting the ability of innovator companies to manage risk and avoid the costs and uncertainty of litigation, the 3rd Circuit’s rule dramatically diminishes incentives for innovation and product development,” the trade group argued.
A similar case is pending before the California Supreme Court. The state attorney general’s office intervened in a lawsuit against Bayer over a deal to delay a generic version of its Cipro antibiotic drug. “During its monopoly period, a single Cipro pill costs consumers upward of $5.30, while with generic competition, the same pill should have cost only $1.10,” the state said.
Authorized Generic Deals
Adding into the mix of pay for delay deals, a New Jersey court recently threw out an antitrust lawsuit against Teva and GlaxoSmithKline, “ruling that patent settlements that involve authorized generic (AG) agreements are not illegal. An AG is a drug that is chemically identical to the branded drug but sold as a generic product. As noted by a recent client alert from Arnold & Porter, the “FTC has devoted considerable effort to analyzing the competitive implications of AGs in the pharmaceutical industry,” including a multi-year study of the issue and releasing an extensive report of its findings in August 2011, concluding that the launching of AGs can reduce both retail and wholesale drug costs
Authorized generic deals would not be considered “reverse payments” under the 3rd Circuit’s July K-Dur decision, says the district court, which falls under that circuit’s jurisdiction. A post from the FDA Law Blog provided a good analysis of this case, which may find itself in the mix of pay for delay decisions.
The New Jersey case was brought against GlaxoSmithKline (“GSK”) and Teva Pharmaceutical Pharmaceuticals, (“Teva”) by direct purchasers of certain anti-epileptic drug products containing the active ingredient lamotrigine and marketed by GSK as LAMICTAL. “The direct purchaser plaintiffs allege that GSK and Teva violated Sections 1 and 2 of the Sherman Act when they entered into an agreement providing, among other thing, that GSK would not market an authorized generic version of Lamictal Tablets and Lamictal Chewables, and that such agreement was well beyond the exclusionary scope of a now-expired patent listed in the Orange Book for GSK’s lamotrigine drug products and constitutes a naked market allocation agreement.”
According to the post, “GSK and Teva each filed a Motion to Dismiss the case arguing that there was no reverse payment, but only a negotiated early entry date for marketing the generic LAMICTAL drug products. FTC, whose motion to file an amicus brief in the case was granted, took the position that a branded drug company’s commitment, as part of a drug patent settlement agreement, not to launch an authorized generic to compete with a generic version of the product approved under an ANDA – a “no-AG” agreement – constitutes a “payment” under the Third Circuit’s K-Dur decision.”
In an unpublished decision handed down just one day before the U.S. Supreme Court decided to hear the ANDROGEL drug patent settlement agreement case, Senior District Judge William H. Walls granted GSK’s and Teva’s Motions to Dismiss the case on the basis that a “drug patent settlement agreement based on negotiated entry dates is not subject to antitrust scrutiny.” “Judge Walls’ decision turned on the interpretation of what constitutes a “payment” under the Third Circuit’s K-Dur decision. “The Court finds that the term ‘reverse payment’ is not sufficiently broad to encompass any benefit that may fall to Teva in a negotiated settlement. The Third Circuit’s K-Dur opinion is directed towards settlements when a generic manufacturer is paid off with money, which is not the case here,” wrote Judge Walls.
The FDA Law Blog explained how the opinion discussed four separate bases supporting his decision: “a careful reading of K-Dur shows that the Third Circuit contemplates a cash payment when it uses the term ‘reverse payment,’” the lack of any case in which a drug patent settlement agreement without a cash payment was subject to antitrust scrutiny, and that the lamotrigine agreement actually created generic competition sooner than otherwise would have occurred had Teva not challenged GSK’s patent.
The lamotrigine case is the second case in which the FTC has expressed concern that a “no-AG” agreement constitutes a “payment” under the Third Circuit’s K-Dur decision. In August, the FTC sought leave to file an amicus brief in private antitrust litigation pending in the U.S. District Court for the District of New Jersey before Judge Joel A. Pisano concerning Wyeth Pharmaceuticals Inc.’s anti-depressant drug EFFEXOR XR (venlafaxine HCl) Extended-release Tablets. Judge Pisano denied the FTC’s motion for leave to file its amicus brief. The case has been stayed pending the conclusion of the proceedings in the U.S. Supreme Court in In re K-Dur Antitrust Litig.
Another AG case was also announced last fall, in which the FTC has moved for leave to file an amicus brief in US District Court in New Jersey in In re Effexor XR Antitrust Litigation, arguing that a branded company’s commitment not to launch an AG in competition with a generic company (a “no-AG commitment”) as part of a patent settlement constitutes a “payment” for delayed generic entry under the Third Circuit’s decision in In re K-Dur Antitrust Litigation adopting the FTC’s position on the standard for antitrust review of pharmaceutical patent settlements. The Arnold & Porter client alert noted above gives an in-depth analysis of this litigation and its potential impact.
In the end, the law firm recommend that pharmaceutical companies “closely scrutinize the antitrust implications of proposed agreements involving patents” because “Patent licensing agreements may soon be subject to more inclusive rules requiring a larger number of such agreements to be considered asset acquisitions subject to the filing requirements of the HSR Act.”
Moving Forward
In light of the recent case law in this area, the law firm of Arnold & Porter wrote a detailed client advisory explaining some of the implications these cases and FTC action may have on the pharmaceutical industry. For example, the advisory notes that on August 13, 2012, the FTC made public a proposed rule to amend the Hart-Scott Rodino (HSR) premerger notification rules that would increase the number of pharmaceutical patent licensing agreements that would be subject to pre-consummation filing and review.
The HSR Act and its implementing rules require that certain mergers and acquisitions be filed with the FTC and the Antitrust Division of the Justice Department and that the parties observe a waiting period prior to consummating the transaction. Previously, the FTC stated in guidance that the grant of an “exclusive” patent license (that is exclusive against the licensor and all third parties, i.e., not subject to preexisting licenses) is a potentially reportable asset acquisition under the HSR Act and rules. The FTC’s proposed revisions to the HSR rules, however, “would change this standard—though only for licenses relating to pharmaceutical patents.”
Under the proposal, a transfer of “all commercially significant rights” to a pharmaceutical patent—defined as including biologics, in-vitro diagnostics, as well as pharmaceuticals9 —is reportable if it otherwise meets the HSR Act’s size-of-transaction and size-of-person thresholds. The FTC defines “all commercially significant rights” as “the exclusive rights to a patent that allow only the recipient of the exclusive patent rights to use the patent in a particular therapeutic area (or specific indication within a therapeutic area.
A transfer of “all commercially significant rights” occurs even if the patent holder retains the right to manufacture solely for the rights recipient (licensee) or retains rights to assist the recipient in developing and commercializing products covered by the patent (so-called “co-rights”). “Thus, an agreement under which the patent holder grants an exclusive license to make and use products for cardiovascular use under a patent and retains the rights to manufacture such products solely for the licensee could be a reportable transaction (subject to satisfying other aspects of the HSR reportability test), even if the patent holder retains the right to manufacture products for third parties in other therapeutic areas.”